ii view: British Gas owner Centrica bullish on profit estimates

The business portfolio for this major energy supplier continues to evolve and the shares are moving higher. We assess prospects.  

Trading update from 1st January to the end of April

ii round-up:

Energy supplier and British Gas brand owner Centrica (LSE:CNA) today flagged its expectations for full-year earnings to be at the top end of current City expectations. 

The FTSE 250 company, which also operates energy trading and production businesses, now expects adjusted earnings per share to be towards the upper end of analyst estimates of between 6.7p and 10.8p per share. 

Centrica shares rose by more than 5% in UK trading having come into this latest update just under 1% higher year-to-date. That compares to losses for the FTSE 100 and FTSE 250 indexes of 2.2% and nearly 18% respectively over 2022. Shares for the UK’s biggest renewable energy generator SSE (LSE:SSE) are up by just under 10% and oil majors Shell (LSE:SHEL) and BP (LSE:BP.) are both up by more than 20%. 

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Volumes for Centrica’s gas production assets, and its 20% interest in the UK’s nuclear power generation fleet, both fed into the positive earnings guidance. So did performance of its Energy Marketing and Trading business as it secured increased volumes of gas and renewable energy. 

Less favourably, its British Gas Services and Solutions operation suffered supply chain disruption, with higher inflation hitting both its cost base and customer demand. The division supplies over 7 million residential customers with energy, with its 7,000 engineers providing services such as boiler maintenance to over 3 million customers. 

Centrica has in the recent past been simplifying its portfolio of businesses, including reducing its upstream exploration and production exposure via the previously agreed sale of its Spirit Norway business.  

First-half results are scheduled for 28 July alongside which management plans to provide an update on its business priorities and financial framework.

ii view:

Centrica supplies domestic customers with energy in both the UK and Ireland via its British Gas and Bord Gáis Energy in the Republic of Ireland. It also supplies around 350,000 business customers with energy via its Centrica Business Solutions division. Its Centrica Energy Marketing and Trading division trades in liquefied natural gas and gas, often connecting suppliers in the wholesale markets, while its Upstream business owns gas and oil exploration and production assets, along with a 20% interest in the operational UK nuclear power generation fleet. 

Centrica has been pursuing plans to sell or reduce its upstream business, as well as exit its stake in EDF's nuclear plants in the UK. Its climate change ambition is to become net carbon zero by 2045 and help its customers be net zero by 2050. 

For investors, accompanying outlook comments pointing towards significant uncertainties ahead, including the weather, commodity price movements and the potential for increased bad debts given its inflation squeezed customers, cannot be ignored. The positive performance from its upstream business as opposed to its core supply arena is also noteworthy. 

On the upside, long term consideration for repurposing Spirit Energy's retained UK assets is now being made under climate change considerations. A previous net debt position had, as of its 2021 annual results, been replaced with net cash, while there should be a generous yield when dividend payments resume. On balance, and while some caution looks sensible, more speculative investors are likely to stay patient.

Positives

• Previous business sales have reduced debt
• Company now more focused 

Negatives

• Subject to commodity price movements
• Cost of living crisis impacting its customers

The average rating of stock market analysts:

Strong hold